Spending on Performance-Based Awards Remains Strong

Salaries for U.S. workers continue to rise incrementally as concerns remain about the stability of the global economy. However, workers have the potential to offset low base pay increases through performance-based awards, a survey by HR consultancy Aon Hewitt reveals.

According to the survey of more than 1,300 U.S. companies, base pay increases for salaried exempt workers were 2.8 percent in 2012, up marginally from 2.7 percent in 2011. Salaries have inched upwards year-over-year since 2009 when pay increases reached an all-time low of 1.8 percent.

Pay increases are expected to rise slightly in 2013. For executives, salaried exempt and salaried nonexempt workers, Aon Hewitt projects base pay increases of 3.0 percent in 2013, in line with
other recent salary surveys.

"It is unlikely that salary increases will reach pre-recession levels of 4 percent or higher any time soon," said Ken Abosch, compensation marketing, strategy and development leader at Aon Hewitt. "Companies are more impacted by the global economy than ever before, as a result organizations continue to be conservative with their spending, but we anticipate that attitude will remain even after the economy rights itself—holding down spending on base pay is the new normal."

Employers continue to offer variable pay, or performance-based awards that must be re-earned each year, as a primary way to drive performance and increase engagement while minimizing their fixed costs. In 2012, 90 percent of companies offered at least one variable pay program, in line with 2011, according to Aon Hewitt's report.

Overall spending on variable pay as a percentage of payroll continues to rise steadily for salaried exempt workers. In 2012, companies spent 12 percent on variable pay, compared to 11.6 percent in 2011. Spending is expected to rise slightly to 12.1 percent in 2013.

Nonunion hourly workers saw the biggest jump in variable pay in 2012. As a percentage of payroll, employers spent 6 percent on variable pay rewards for nonunion hourly workers in 2012, compared to 5.2 percent in 2011. However, spending is expected to fall slightly to 5.6 percent in 2013 for this group.

"Organizations are being more strategic with the limited compensation dollars they have to spend," explained Abosch. "They are spending less on base pay increases for all workers, and instead, are rewarding high performing workers with larger performance-based awards. This allows them to better control spending, while still providing incentives for their best employees."

Companies are planning pay increases that will average 2.9 percent in 2013 for their salaried non-management employees, according to the
Towers Watson Data Services Salary Budget Surveyof 857 U.S. companies, conducted in June and July of 2012. This represents a moderate increase from the average 2.8 percent raise salaried non-management employees are receiving in 2012 and the 2.7 percent increase they received in 2011. Similar raises for 2013 are planned for executives and nonexempt employees.

Moreover:

• Exempt workers who receive the highest performance ratings will be in store for an average salary increase of 4.7 percent in 2012, which is roughly 50 percent more than workers with average ratings will receive (3.2 percent), Towers Watson found.

A separate
Towers Watson U.S. Talent Management and Rewards Survey of 278 U.S. companies, conducted in May and June of 2012, found that companies’ average projected bonus funding for 2012 performance is 93 percent of target, marking the second consecutive year that companies are unable to fully fund their annual bonuses for workers. U.S. companies funded annual bonuses in 2011 at 95 percent of target.

“Companies will have to make up for these lower funding levels by doing a better job of differentiating rewards between top performers and underperformers,” commented Laurie Bienstock, North America Rewards leader at Towers Watson.